The Cambridge Weekly – 6th February 2023

The Cambridge Weekly – 6th February 2023

Are central banks transforming from hawks into doves?

Last week was like the other four weeks of 2023: dominated by central bank action, inflation, and despondency over the UK economy. Meanwhile, stock and bond markets stayed buoyant. The monthly US jobs report was a surprise which unsettled US markets on Friday, as investors looked to assess its implications for the Fed and interest rates in 2023.

January 2023 review – a decent start, but more questions than answers

If investors were hoping for a turnaround in fortunes, they hardly could have asked for a better start to the year. While 2022 brought plenty of downpours, the first month of 2023 was all sunshine in capital markets. January’s equity market returns were positive across all major economies – many spectacularly so. This was in large part down to the good feeling in bond markets, which saw yields fall and thus the relative attractiveness of equities increase. Across the major asset classes we monitor, only one had a down month: commodities. But given how commodity inflation terrorised the global economy last year, this was viewed as an unequivocally good thing.

How long is the lag – or why is that lag suddenly shrinking?

Last year was ‘the great tightening’ for central banks. Interest rates in the US, UK and Eurozone rose at the fastest pace in a generation, sending bond yields skyward  and draining capital markets of liquidity. Investors hope 2023 will be much milder. Central bankers in all three of those economies met last week – and all raised rates once more.